On January 1, 2016, Pharoah Corporation acquired machinery at a cost of $1560000. Pharoah adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of 10 years, with no residual value. At the beginning of 2019, a decision was made to change to the double-declining balance method of depreciation for this machine. The amount that Pharoah should record as depreciation expense for 2019 is $156000. $218400. $312000. $468000.

$218,400.

Explanation:

Depreciation is a method that is used by companies to allocate the cost of property, plant, and equipment over its useful life. The amount of depreciation is charged to P&L statements and is expensed out. The purpose of depreciation is incorporate the loss in the value of asset over time, also it is used for taxation purposes. There are two methods of depreciation:

1) Straight-line: The cost is allocated evenly over its useful life.

2) Reducing/Declining: Higher depreciation expense is charged in the initial years.

In this case, the company used the straight line method for first 3 years, that is from January 1, 2016 to December 31, 2018, and then switched to double declining method.

Calculation

Under straight line method, the depreciation expense is calculated as follows:

Depreciation Expense = (Cost - Residual value) / Useful Life

⇒ Annual depreciation expense = (1,560,000 - 0) / 10 = $156,000 OR 10%.

This amount will be charged to P&L statement each year. Since, the company has used straight-line method for three years, so the book value at the end of third year will be $1,092,000 [1,560,000 - (156,000 * 3)].

Switching to Double-Declining Method

The formula to be used for double-declining method is given below;

Depreciation = Book value period start * Straight-line depreciation rate * 2

⇒ Depreciation = 1,092,000 * .1 * 2 = $218,400.

The answer is B. $218,400

Explanation: In this question, two methods of calculating depreciation were used.

First was straight-line method.

We calculate as follows:

(Cost - salvage value)/useful life

Cost = $1,560,000

Salvage or residual value = 0

Useful life = 10years.

We have:

(1,560,000 - 0)/10

= 1,560,000/10

= $156,000

This value is the expected depreciation amount every year.

On the third year however, Pharoah Corporation switched to double declining method. On the third year, the value of the machinery will be:

$1,560,000 - ($156,000 x 3)

= $1,560,000 - $468,000

= $1,092,000.

Now to use double declining method to calculate the depreciation, we have:

First divide 100% by useful life

100%/10 = 10%

Now multiply the percentage by 2

10% x 2 = 20%

Next step is to multiply this percentage by the remaining cost of the machinery on the third year, we have:

$1,092,000 x 20%

= $1,092,000 x 0.2

= $218,400.

Therefore, the answer is B.

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